Helping children learn to save
“HOW do we help our children financially?” is a much asked question. It sounds simple enough but can become a challenging task.
In our home we work on two basic tenets. First, a parent’s primary duty is to help their children become the best they are capable of being. Second, it is better to progressively gift them assets when they are young and battling instead of waiting until a time when you are 85 years of age, and they might be nearing retirement.
Of course, these two goals may not be complementary. Every human being needs to learn self reliance, but every time you do things for them which they should be doing for themselves, you decrease their ability to become self reliant. That is why we walk the tightrope of giving a helping hand where it is needed and yet not shielding them from problems which will help them grow.
But achieving that goal need not necessarily mean giving all your children equal amounts of cash. One of your children may be totally fulfilled working as a counsellor for a non profit organisation – the other may have the talent and drive to be a high income earning professional. As like tends to marry like, you could easily find yourself in a situation where one of your children and their partner earns ten times the earnings of the other one and their partner.
Given these circumstances it may be extremely difficult for the lower earning family to give you grandchildren without your help because they may find it impossible to live on one income. Surely, if all other things are equal, this is the child that should be favoured in the early stages if you have spare money which can be used to help out.
Financial incentives for saving work well too. If you are trying to encourage your child to save a deposit for a home you could offer to give them a dollar for every dollar they save, up to a set figure. It’s a win win - they get 100% on their money and you get the joy of watching them become smart savers.
Certainly it’s appropriate to help if your child faces a financial crisis because of an event such as illness that is our of their control,. But it’s a different matter entirely if they are in financial strife through financial ineptitude, because as sure as night follows day, they will never learn to manage money properly if you keep bailing them out. As painful as it may be, you are much better off to sit back and watch the power being turned off and the car being repossessed, because these are the lessons they need to get their lives in order. Moral support, yes – money, no.
Yes – it is a challenge, but remember two other basic principles. It is better to teach them how to make money than to give it to them, and what you don’t spend in your lifetime they will. Think about that next time you are scrimping on a holiday.
Question: In a recent column you mentioned the case of the 52 year old wife and the husband turning 60 in November. From what I read, I got the impression that as soon as one turns 60 years old, one can freely withdraw from their super. Is this correct, or are there conditions that have to be met before one can withdraw from super - i.e. one should retire from work?
Answer: You can withdraw your superannuation freely once you reach 65 but at age 60 you have to trigger a condition of release. To do this you have to resign from a job - it need not be your main job. Of course, a person aged 60 could stay in their present job and access part of their superannuation as a lump sum by use of a transition to retirement pension.
Question: We have just built a new property and unfortunately have to move for work reasons. We have never lived in the property but expect to move in after two years of renting it. Will we be eligible to claim the property as our main residence and avoid CGT?
Answer: If you rent the property and then move out of it you will be liable for CGT on a pro rata basis according to the time it was rented out. But if you move into it for a while before you rent it out you will be able to be absent from it for up to six years without losing the CGT exemption provided you do not claim any other property as your principal residence in that time.
Question: My husband and I are both 50 years old and a financial adviser suggested we change our principal and interest home loan to an interest only loan so we can feed funds into superannuation. Once we retire the plan is to pay the mortgage out with the superannuation. Our home is worth approximately $900,000 and we have a $250,000 mortgage.
We have approximately $140,000 super between the two of us, and have teenage sons, so our expenses will be high for the next ten years. What do you think of this strategy?
Answer: That is very good advice because money salary sacrificed to super loses just 15% whereas money taken in hand would normally lose at least 31.5%. Also, because of your age you have little fear of the laws changing to restrict the amount that can be withdrawn tax free once you reach 60.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org.